Market 02/16: PPI higher than expected - market lowers expectations for Fed rate cut in May

January PPI: producer inflation higher than forecast

January PPI rises higher than expected across all categories:

Year-over-year growth (YoY):

Aggregate PPI +0.9% YoY (> estimate 0.6%)
Core PPI +2% YoY (> estimate 1.6%)

Month-over-month growth (MoM):

Aggregate PPI: +0.3% MoM (> expected +0.1%).

Core PPI: +0.5% MoM (> expected +0.1%), highest since January 2021.

Service costs lead the increase, highest since July, while energy and food prices both declined.

Service PPI rises largely from Portfolio Management Costs (PPI Portfolio Management): highest increase up to +5.5% MoM (+7.2% YoY).

PPI Portfolio Management was added to the PPI basket in 2005 to expand the scope of service industry cost calculations for wholesale and business producer inflation.

... the reason is rising stocks pulling up fund management and portfolio management costs.

Market reaction:

Government bond yields surge after PPI report: 10Y yield reaches 4.3%.

Just a few weeks ago, the market expected Fed to cut rates in March 2024. Now, expectations for a cut in May 2024 have also decreased (~30.6%)
- Market shifts to expecting Fed rate cuts starting in June.

Fed officials' statements: Barr and Bostic

Fed official Barr:

Maximum focus on commercial real estate risks (CRE).
Supervisors are examining unrealized losses (unrealized losses) + Banks are being downgraded at a faster rate.
Fed considering increasing capital and liquidity requirements for banks struggling with risk management.

Barr rarely comments on monetary policy, focusing on bank regulation.

Fed official Bostic:

Fed to soon consider rate cuts but not rushed: ~2 cuts in 2024.
Inflation to decline slower than expected + Labor market remains strong.

New home construction activity declines most since 2020

Number of new homes built decreases -14.8% MoM to 1.3 million units (< expected 1.460 million units) → Lowest since April 2020.
Number of building permits decreases -1.5% MoM, to 1.470 million units (< expected 1.509 million units).

→ Housing market expected to recover slowly as buyers wait for mortgage rates to fall.

New home inventory rises sharply → Homebuilders cautious in starting new projects.

→ The housing market recovery faces difficulties as mortgage rates rise near 7%. However, homebuilders expect continued decline in borrowing costs to boost demand.

UMich survey: Consumer confidence improves despite inflation expectations rising again.

Consumer 1-year inflation expectations rise to 3% (> previous 2.9%).

5-10 year inflation expectations (orange) unchanged at 2.9%.

Consumer sentiment index rises for 3 consecutive months, reaching 79.6 (but below estimate 80).
Consumer expectations also rise to 78.4 (> previous 77.1).

→ People are increasingly optimistic about economic prospects and inflation.

IEA: Oil market to have supply surplus in 2024

IEA says oil demand stalls while non-OPEC+ supply continues to increase, potentially leading to market supply surplus.

2024 forecast, global oil demand to increase only 1.2 million barrels/day - half compared to last year.

However, Brent oil price still rises to ~83 USD/barrel, WTI hovers ~78 USD/barrel - highest since mid-November

Reason due to OPEC+ supply cuts causing oil prices to surge.

Coinbase ER: Positive revenue report thanks to approved bitcoin ETF funds

Trading volume: +6% YoY, reaching 154 billion USD.
Bitcoin: accounts for 31% volume (-4% YoY).
Revenue: +52% YoY, reaching 954 million USD (> expected 135 million USD).
EPS: 1.04 USD (> expected 1.03 USD).

Q1/FY2024 guidance:

Sales and Services: ~ 410-480 million USD (> expected 373 million USD).

Crypto received significant attention in Q4 last year after SEC approved the first spot Bitcoin ETF → Boosting demand.

Coinbase stock rises more than 15% in after-hours session after positive earnings report.

Some other news:

Nike expects to lay off 2% of workforce (~1,500 employees) to restructure amid slowing consumer spending.
OpenAI launches Sora, a tool for generating short videos from text, attracting attention on social media platforms.
- Cryptocurrency Worldcoin (WLD) surges 25% overnight.

Super Micro Computer stock, $SMCI, drops 15% in 10 minutes after stunning surge to 1000 USD/share.

China 'showcases' domestically produced C919 aircraft at Singapore Airshow amid supply shortages.
- C919 is only certified by Chinese regulators and relies on international supply chain for production.